Medicare Part C – Medicare Advantage (MA Private Plans)

Medicare Advantage plans are private health plans that contract with Medicare to provide services to enrollees. Private health plans have been available in Medicare almost since the program began. But payment policy and rules about benefit design and quality measurement have evolved over time. When Congress first authorized private plans in Medicare, its intent was to contain the growth in spending and improve the payment method for certain providers. It also sought to provide beneficiaries with more choices and enhanced coverage. These objectives remain relevant. Medicare Advantage (MA), also known as Medicare Part C, is Medicare’s private plan program. It is an alternative to Traditional fee-for-service (original) Medicare. MA plans must cover all Medicare benefits (except hospice) and may also provide additional benefits. Most MA plans include Part D outpatient prescription drug coverage as well. Enrollment is voluntary. 

To be eligible for an MA plan, a Medicare beneficiary must be eligible for Medicare Parts A and B. All MA plans are required to establish enrollee out-of-pocket spending limits for Parts A and B services. These limits cannot exceed annual maximums established by the Centers for Medicare & Medicaid Services. Maximums vary by plan type. The Centers for Medicare & Medicaid Services (CMS) sets a voluntary and a mandatory cap, with the former being lower. CMS permits MA plans greater flexibility in establishing cost-sharing for Parts A and B services if they use the lower, voluntary limit. For 2022, the voluntary annual limit can be no higher than $3,450, while the mandatory maximum may not exceed $7,550 for in-network services. 

MA has several plan types: health maintenance organizations (HMOs), provider-sponsored organizations (PSOs), preferred-provider organizations (PPOs), regional PPO plans, special-needs plans (SNPs), private fee-for-service (PFFS) plans, and medical savings accounts (MSAs). Most, but not all, rely on a specific network of covered or preferred providers rather than covering all Medicare participating providers. 

Health maintenance organizations: An HMO typically has a tight network relative to other types of plans and uses financial incentives to encourage members to stay within network. However, HMOs may offer a point-of-service option that allows an enrollee to obtain services out of network for higher out-of-pocket costs. MA HMOs may include different models of HMOs, including staff model, group model, or network model HMOs. 

Provider-sponsored organizations: Similar to HMOs, PSOs are organized and operated by physicians and hospitals. They provide most services within their organized network. 

Preferred-provider organizations: PPOs are networks of physicians and hospitals that have agreed to discount their rates for plan members. Enrollees may obtain services from non-network health professionals but must pay higher out-of-pocket costs if they do. 

Regional PPO plans: Similar to local PPOs, regional PPOs cover a larger service area. They feature a single deductible for Part A and Part B services and an out-of-pocket limit for in-network care and expenditures for benefits also offered by Traditional Medicare. 

Special-needs plans: SNPs focus on the needs of individuals who are institutionalized, are dually eligible for Medicare and Medicaid, or have severe or disabling chronic conditions. Most SNPs are HMOs. 

Private fee-for-service plans: PFFS plans closely resemble Traditional Medicare but are operated by private insurance companies. They permit enrollees to go to any Medicare-approved doctor or hospital willing to accept the plan’s payment. Unlike other MA options, physicians in PFFS plans may balance-bill 15 percent above the plan’s fee schedule. This and other PFFS plan features have the potential to cause confusion for Medicare beneficiaries and make it difficult for them to distinguish this option from Traditional Medicare. 

Medical savings account plans: Medicare MSAs have two components. The first is an MA plan with a high yearly deductible (which varies by plan) with premiums paid by Medicare; the plan pays for covered benefits once the deductible has been met. The second is a tax-free savings account to which both Medicare and beneficiaries contribute. It may be used to cover deductibles and coinsurance charges or to pay for health services that Medicare does not cover. Beneficiaries who choose the MSA option may not have Medicare Supplement insurance. 

Private health plans in Medicare pose both opportunities and risks for the program and its beneficiaries. The wide array of private health plan options gives beneficiaries greater opportunity to find plans that meet their needs and preferences. But giving beneficiaries more choices makes selecting coverage more complicated. Choosing coverage may be so confusing for some that it leads to poor decisions. 

This concern is supported by behavioral economics research findings that indicate greater choice does not necessarily lead to better decisions. Although consumers value choice, it is necessary to balance the desirability of a wide range of complex choices with the cognitive burden of having to select from among too many. Experts advise that reducing cognitive burden is one strategy for improving consumer decision-making. This can be done by limiting the number of choices and creating accessible and easy-to-interpret materials that allow clear comparisons of choices. 

Another problem is that many beneficiaries may not be aware of certain risks associated with MA plans. This includes provisions that plans may terminate their relationship with Medicare in any given year. They may change the premiums, cost-sharing charges, or benefits from year to year as well, including drug coverage. They may also drop physicians from their networks during the year. Beneficiaries may also be unaware that if they voluntarily leave an MA plan and return to Traditional fee-for-service Medicare, they may be subject to medical underwriting for a Medicare supplement (Medigap) policy. This underwriting may result in their being refused a policy or being required to pay higher rates. 

Additionally, the Medicare risk pool is segmented by having multiple coverage options and two pathways to coverage (MA and Traditional). There was some historical evidence that the healthiest beneficiaries were more likely to enroll in a less expensive MA option. This left sicker, more expensive beneficiaries in the Traditional Medicare program, resulting in higher premiums for Traditional Medicare. Among the MA plan options, PFFS and MSA plans are likely to attract the healthiest beneficiaries of all. Over time, as enrollment in MA has grown to almost half of all Medicare, the population enrolled in MA now is similar to the overall population. 

Under current MA rules, Medicare payments to MA plans are risk-adjusted. An accurate risk-adjustment mechanism helps mitigate the effects of risk segmentation by increasing payments to health plans for high-cost or high-risk enrollees and reducing payments to plans with healthier enrollees. However, this also creates a financial incentive for MA plans to identify and report enrollees’ health conditions more intensively (see discussion below on upcoding and coding intensity adjustment).   

MA plans, including Special Needs Plans (SNPs), are an important alternative for many Medicare beneficiaries, especially those with low incomes. Data from the 2019 Medicare Current Beneficiary Survey indicate that: 

• 49 percent of Black American beneficiaries and 55 percent of Hispanic/Latino beneficiaries were in MA plans, and 
• 64 percent of beneficiaries in MA plans had incomes of $30,000 or less (compared with 55 percent of all Medicare beneficiaries).